The euro area is facing crisis, while the US is not, though the overall fiscal situation and outlook is better in the euro area than in the US, and though the US faces serious state-level fiscal crises. A higher level of fiscal federalism would strengthen the euro area, but is not inevitable. Current fiscal reform proposals (strengthening of current rules, more policy coordination and an emergency financing mechanism) will if implemented result in some improvements. But implementation might be deficient or lack credibility, and could lead to disputes and carry a significant political risk. Introduction of a Eurobond covering up to 60 percent of member states’ GDP would bring about much greater levels of fiscal discipline than any other proposal, would create an attractive Eurobond market, and would deliver a strong message about the irreversible nature of European integration.

The relation between the ECB’s main refinancing (MRO) rates and the money market is key for the monetary transmission process in the euro area. This paper investigates how money market rates respond to the new information revealed by MRO auctions. Our results confirm a stabilizing level relationship between the overnight rate Eonia and MRO rates before the financial crisis. Since the start of the financial crisis, however, we find that MRO auction outcomes even exacerbated the disconnection of money market rates from the policy-intended interest rate level. These findings support the fixed rate full allotment policy introduced by the ECB as an unconventionalmeasure to re-stabilize banks’ refinancing conditions.

The introduction of the Euro has been accompanied by the hope that intra-EMU trade would increase and that prices would converge due to increased elasticities of international substitution. This paper contributes to the literature on the Euro’s eﬀects on international trade by analyzing price elasticities in international trade ﬂows between Germany and France and between Germany and the United Kingdom before and after the introduction of the Euro. Using disaggregated Eurostat trade statistics for up to 715 product categories, we adopt a heterogeneous dynamic panel framework for the estimation of price elasticities. We suggest a Kalman-ﬁlter approach to control for unobservable quality changes which otherwise would bias estimates of price elasticities. This approach delivers reasonable estimates of price elasticities for a broad set of products. Furthermore, we divide the complete sample, which ranges from 1995 to 2008, into two sub-samples and show that the hypothesis that price elasticities in trade between EMU members did not change substantially after the introduction of the Euro cannot be rejected. This result is robust with respect to changes in the estimation technique.

A Triangular Analysis of Exchange Rate Determination and Adjustments – The case of RMB, the US dollar and the euro

Exchange rate determination is of phenomenal importance in international economic relations and should be scrutinized with diverse perspectives and from various points of view. While RMB is pegged to the US dollar, the exchange rate between RMB and the euro is not fixed, due to that the exchange rate between the euro and the US dollar is not fixed. Since RMB is not a small currency, its pegging to the US dollar would have a profound effect on the floating exchange rate between the US dollar and the euro, forcing the exchange rate between the US dollar and the euro to depart from a “fair” market determined rate if the exchange rate between the US dollar and RMB is not set right. The above scenario provides us with a means to assess the fairness of exchanges rates resulting from pegs. Our analysis suggests that when RMB is overvalued relative to the US dollar, the euro would tend to be overvalued relative to the US doll ar too, and vice versa. This in turn leads to a channel for examining whether RMB is undervalued or overvalued against the US dollar, an argument all stemming from the effective peg of RMB to the US dollar. It is to scrutinize the exchange rate of the US dollar vis-à-vis the euro to establish ultimately whether RMB is undervalued or overvalued vis-à-vis the US dollar. That is, an overvalued euro currency vis-à-vis the US dollar would imply a kind of overvaluation of RMB vis-à-vis the US dollar; or put it another way, an undervalued euro currency vis-à-vis the US dollar would justify that RMB is undervalued vis-à-vis the US dollar. As a corollary derived from the above analysis, if the objective of the monetary authorities is to float RMB at the right exchange rate and at the right time, a triangular rotation approach to anchoring currencies can be appropriate. A peg of RMB to a basket of currencies is unfeasible, inconvenient and moreover, unable to avoid being critici zed for pegging at an artificially low value as its peg to the US dol lar. While it has been increasingly acknowledged that competitive advantages in international trade in the long run can rarely benefit from distorted exchange rates, a notion of currency undervaluation remains cumbersome.

This paper examines the art of central banking as practised by the European Central Bank (ECB) through the prism of Goodfriend’s (2009) determination of the three policies that fall within the remit of a central bank: monetary policy, which consists in varying the size of the balance sheet, credit policy, which consists in modifying the credit structure, and interest rate policy, which consists in adjusting the interest rates of the marginal lending and deposit facilities. The theoretical literature emphasises the existence of a separation principle between the first policy, which seeks to ensure monetary stability and the other two policies, which are intended to ensure financial stability through the smooth functioning of the interbank money market. This paper shows in particular that a central bank not only has the capacity but indeed must strive to separate the conduct of its monetary policy, which must seek to ensure medium and long-term price stability, from that of its credit policy, which is driven by short-term imperatives and consists in supplying the banking system with liquidity in the event of temporary money demand shocks. During the first part of the crisis, the ECB acted in accordance with the separation principle. However, it became increasingly difficult to apply as interest rates approached the zero-lower-bound. In effect, the unconventional measures adopted by the ECB created interference between its monetary policy, its credit policy and its interest rate policy.

A main component of customs unions is a common trade policy on imports from non-member countries. Trade policy covers both tariff and non-tariff barriers like trade procedures. We argue that since trade procedures vary markedly across EU countries, the EU is not, strictly speaking, a customs union. To illustrate this, we estimate the impact of trade procedures on exports from non-EU countries and find a highly statistically significant and negative effect. Simulating what the effects would be of harmonizing trade procedures, i.e. to actually complete the EU customs union, we find that aggregated exports to the EU would increase by 20 percent for the average exporter.

The objective of this paper is twofold. First, against the background of an existing empirical literature on the duration of trade which has found that international trade is often of strikingly short duration, we aim to establish whether or not EU imports from the rest of the world also are short-lived. Second, since there is at this point no clear commonly accepted theoretical explanation for these short trade durations, we seek to provide a thorough empirical description and analysis of the phenomenon, with the intention of thereby facilitating theoretical developments on the subject. We employ a rich data set of detailed imports to the EU15 countries from 140 exporters, covering the time period 1962-2006. Using these data, we begin by conducting a thorough descriptive analysis of the duration of EU imports. Thereafter, we perform a regression analysis using discrete-time duration models with proper controls for unobse rved heterogeneity. We draw the conclusion that EU imports are indeed very short-lived – in fact, possibly more so than, for example, US imports. The median duration of EU imports is for example merely one year, and almost 60 percent of all spells cease during the first year of service. Among our empirical findings are (i) that the duration of trade remains stable across the long time period that we study; (ii) that short trade durations are the result of at least two processes: countries shifting between different suppliers but continuing to import a given product, and countries ceasing to import the product altogether; and (iii) that countries with a diversified export structure also will tend to have more long-lived export flows. In our formal regression, we are also able to find a set of explanatory variables that have statistically significant effects on the probability that trade flows die.

This report to the Irish Minister for Finance by the Governor of the Central Bank describes the the performance of the respective functions of the Central Bank and Financial Regulator in the period 2003-8 in order to arrive at a fuller understanding of the root causes of the systemic failures that led to the need for extraordinary support from the State to the Irish banking system.

The article estimates the likely credit losses in the EU10 countries’ banking sector, supposing that economic conditions were to deteriorate further, and that local currencies were depreciated. Factors that may affect the cumulative level of credit losses are discussed. The article concludes that even if the macroeconomic environment were to worsen, credit losses in the EU10 banking sector are likely to be substantial, but remain manageable.